Rightways - Sowing the seeds of Succes

Saturday, 31 July 2010

Household consumption is watched even though rates rise has not affected debt repayment

WHEN Bank Negara raised interest rates for the third time this year earlier this month, expectations were that the ringgit would appreciate.

That, together with the removal of China’s yen peg to the US dollar, led to suggestions that the ringgit could regain some of the buoyancy in its value against the US dollar that had seen the local currency emerge as one of the best-performing currencies this year.

There was also the school of thought that suggested those domestic interest rate hikes had created a buffer between rates in Malaysia and elsewhere that might see the local currency becoming a carry trade currency.While the ringgit is not yet seen as a carry trade currency, its slow ascendency against the US has been seen after the third rate hike earlier this month.

After interest rates were raised by 25 basis points to 2.75% in the July 8 meeting of the Monetary Policy Committee, the ringgit saw a brief spurt against the dollar but has since see-sawed in a narrow band.

But that has changed a wee bit as the ringgit has strengthened to its highest level this year as RM3.18 to the dollar yesterday.

That pattern of trade has somewhat broken away from the initial pattern seen after the yuan ended its peg against the US dollar last month.

After a surge, the Chinese currency has traded within a narrow band of between 6.77 and 6.78 to the dollar.Notwithstanding the slow rise towards the year high for the local currency, the interest rates hikes in recent months, which the central bank says is a move towards normalisation, has led to money entering Malaysia.

While higher domestic rates might have been the main factor, another was the fact that selected Asian currencies were the flavour of the month, given the economic malaise in Europe and the sluggishness of the US economy.

In a response from Bank Negara to StarBizWeek, the central bank says portfolio capital flows were influenced by both domestic and external factors. Domestically, the impressive 10.1% GDP growth in the first quarter of the year, talk of a stronger economy and the transformation of Malaysia into a high-income economy have whet the appetite of investors.

The central bank said in the first quarter of 2010, portfolio inflows amounted to US$3.4bil, a healthy gain from the US$1.4bil in the fourth quarter of 2009.

“Nevertheless, the pace of portfolio flows in recent months has been relatively modest, given the volatility arising from the European sovereign debt crisis and the lingering concerns over the global economic recovery,” says Bank Negara.

“Overall, the flows have been manageable and well-intermediated by the financial system.”

Bank Negara points out that because of the strength and depth of the domestic financial system, inflows are more effectively intermediated without causing undue risk to the economy.

It cites the fact that the ringgit bond market is one of the largest in this region, with a size of 94.1% of GDP.Furthermore, the country’s Islamic bond market is also deeper than other markets, with the highest number of sukuk issuances recorded this year thus far.

“At the same time, Bank Negara has developed a robust surveillance system that enables us to monitor capital flows on a near real-time basis and Bank Negara is equipped with a wide range of monetary instruments to sterilise these inflows,” says the central bank.

“Bank Negara’s policy is solely to maintain orderly market conditions while at the same time ensure that the ringgit is not misaligned from its fundamentals so that it will not contribute to the build-up of internal and external imbalances.”

Bank Negara adds that interest rate differentials is a determinant of capital flows, but it is not the only one.“Some of the other factors include economic growth prospects, exchange rate expectations, anticipated returns in the equity market and other investments, as well as investor sentiments,” it says.

The central bank adds that the overnight policy rate of 2.75% was broadly in line with other regional interest rates and that there are many other countries that have higher official interest rates.

The official borrowing rates of Indonesia, the Philippines, China, India and Australia are 6.5%, 4%, 5.31%, 5.5% and 4.5% respectively.

A recent report by Morgan Stanley suggests that the interest rate hike might also have been used as a tool to attract foreign capital to bolster the country’s foreign exchange reserves, which have not kept pace with the rise seen in the reserves of Malaysia’s neighbours.

Foreign exchange reserves saw a drop in the middle of last year and has basically plateaued from the last quarter of 2009.

While the hikes would lead to more capital flowing in, which is welcomed, considering the quantum of the fall, the country is comfortable with the level of reserves as data for the middle of June says it is sufficient to finance eight months of retained imports and 4.4 times the short-term external debt.

The interest rates hike, however, is seen to have an influence on the real sector as a means to cap skyrocketing property prices.

“One of the major assets facing some strong pressure has been the property market,” says RAM Holdings group chief economist Dr Yeah Kim Leng.

“We needed a tightening to prevent a further build-up in those asset prices.”

The effectiveness of a 75-basis-point rise in interest rates might not quell speculation on properties but with the household sector debt now at 76.6% of GDP, higher repayments for debt taken to buy cars, houses and for other consumption needs would bite into private consumption.

Yeah says the rate hike was a move towards a balance between consumption and savings.

The rise in household debt to GDP was partly due to the contraction of GDP of 1.7% in 2009 but authorities are confident that the financial asset side of the ledger remained sound as financial assets to debt was 2.44 times.

The ratio and growing affluence of households has allowed for increased access to financing and with gross non-performing loan ratio for household remaining low at 2.7% at the end of April 2010, over extension of debt might not be a problem just yet.

Banks tell how they rate credit worthiness of an application

EVERY year, the SMI Association of Malaysia receives complaints from its members about the difficulties of securing credit.

President Chua Tiam Wee says while companies with good track records do not face a major issue in this area, start-up companies and those with less-than-rosy track records continue to have doors shut on them.

Wee suggests two solutions. The first is his call on banks to evaluate the applications of small and medium enterprises (SMEs) carefully and to try to understand the nature of their business and industry.

The second is a call to empower SME Bank to collect deposits, along the lines of a commercial bank.“This may then help the bank to increase lending to SMEs,” he says.

Chua says SME Bank currently relies on Government funding and its paid-up capital of about RM1.35bil is very small.

Azmi says character refers to the borrowers’ “willingness” to repay while capacity refers to their ability to generate adequate cashflow to repay the loan.

The remaining three factors – capital, condition and collateral – can be mitigated or compensated by the favourable economic climate and government-guaranteed schemes such as those under Credit Guarantee Corp (M) Bhd (CGC) and Syarikat Jaminan Pembiayaan Perniagaan Bhd, he says.

Azmi says borrowers must show good character, management competency and ability to repay existing loan obligations and other creditors.

“The lack of credit history for those applying for bank loans for the first time can be mitigated and compensated by relevant supporting documents such as updated financial accounts, bank statements and letter of award,” he says.

He says it is important that SMEs maintain proper book keeping to ensure that these documents are available when required, especially their audited financial accounts. “Loan applications from sectors or industries that the Government is promoting will also have a better chance of having their applications approved,” Azmi says.

He says SME loans make up a fourth of AmBank’s loan portfolio to corporates and enterprises last year.Hong Leong Bank Bhd group managing director Yvonne Chia says loan applications that show good repayment capacity, acceptable business risks and account performance track records will be considered favourably.

She says financial assistance to SMEs comprised 40% of Hong Leong Bank’s business banking portfolio as at March 2010.

Meanwhile, HSBC Bank Malaysia Bhd deputy managing director (commercial banking and director sales) Thomas Varughese says one of the main reasons to reject an application is the lack of financial information that can show the sustainability or viability of a business.

For instance, he says, many SMEs do not pay enough attention to managing their financial position to portray a picture of success, or to show evidence of business continuity.

This makes it difficult to approve the application, Varughese says.

“Poor credit history of the SMEs, including that of its directors and/or guarantors is another issue,” he says.

Varughese says if the SMEs or their associated directors or guarantors have exhibited poor credit history, which is shown in missing payments on their existing loans including personal loans and credit cards, this will give a negative impression on the overall credit assessment.

To secure a loan, he says, SMEs should have a detailed business plan that explains why the loan is needed in the first place.

“It will also be helpful to provide information about the business (company or management profile), nature of the business and financial statements or accounts for at least the last two to three years,” he says.

Varughese says the provision of well-thought-through cashflow statements can also provide further evidence for the need for the financial assistance, adding that SMEs may visit HSBC website for guidance on how to apply for loans.

He says that as of last year, more than 22% of HSBC’s loan portfolio is SMEs loans.

Varughese says the bank is not keen to finance businesses that may be considered as unsustainable or destructive to the environment.

“At HSBC, we believe that being a sustainable business is not only about delivering profitable long-term growth, but also about maintaining a stable environment and building healthy, educated communities,” he says.

Jho Low’s interview captures world attention

'Penangites have a tremendous ability to succeed" - Lim Guan Eng, CM

PETALING JAYA: The world exclusive on Jho Low by The Star has caught the attention of the global media.

Gawker, an American website based in New York City, carried the interview of Low with The Star on its story “Paris Hilton’s mysterious Malaysian party boy tells all”.

The website reported that according to news, Low was paying US$1mil (RM3.18mil) to hang out with her in St Tropez but he told The Star he knew Paris primarily through her parents, whom he had met through his good friend.

The website picked up Low’s explanation on rumours of him renting an apartment in Park Imperial as well as Paris and her sister Nikki accompanying him to St Tropez.

The Newkerala.com, based in India, published the story on Low with the headline “Paris Hilton is just part of group, says Malay­sian businessman”.

The website reported that Low spent a long time in the interview dismissing talk that he was “wasting a lot of money partying”.

A Singapore website asianone.com published the interview with the headline “Paris Hilton’s Malaysian tycoon made his 1st million at 20”.

Singapore’s The Straits Times, in its headline “US$1m before graduation”, alsosummarised the stories published in The Star.

Local dailies as well as news portals and television stations also picked up the interview. Petaling Jaya-based portal Malaysian Mirror headlined its lead story, “Big spender Jho Low speaks up”.

A day after the interview was published, the 28-year-old multilingual Penangite Low continued to get media attention.

New York Post in its story “Paris parties with Jho Low for free”, reported that Hilton denied she had been paid US$1mil to party with Low in St Tropez. Its website quoted a Hilton representative as saying that they were just friends and that Low had invited Paris and her sister Nicky out as friends.

Penang Chief Minister Lim Guan Eng is proud to note the accomplishments of Penangites who are based overseas, including the “well-connected” Low.

“Low is among many Penangites who have excelled internationally. This augurs well for the state as Penangites have shown they have a tremendous ability to succeed when given the necessary opportunities,” he said after opening the three-day National ICT Asso­ciation of Malaysia trade fair at the Penang International Sports Arena here.

Paris `not paid to party` with mystery billionaire

Paris Hilton pays a visit to the Late Show with David Letterman to present the 'Top 10 List'. Ed Sullivan Theater stage door in New York City. - Johns PkI / Splash News

By Daniela Elser Jul 30, 2010, 19:43 GMT

There is no truth to reports Paris Hilton was paid $1 million to party with a mysterious billionaire in the South of France, the New York Post reveals.

The heiress supposedly received the seven figure payday for whooping it up with Malaysian Jho Low in St Tropez. Rumour circulated that she was hired to lounge topless on his yacht and spray him with champagne at the exclusive club, Les Caves du Roy.

A spokesperson for the 29-year-old has baulked at the suggestion, saying, 'They are friends. Jho has invited Paris and her sister, Nicky, out to St. Tropez as friends. He has not paid her in any way, although he is extremely generous.'

Hilton has been enjoying a break on the Mediterranean.

Bringing Hollywood to Malaysian shores

KUALA LUMPUR: Making Hollywood movies in Malaysia is an important part of Jho Low’s plans to help attract investments to the country.

In an interview, Low tells of how he was getting his Hollywood friends like Academy Award winner Jamie Foxx and Leonardo diCaprio to use Malaysia as a location for movies.

DiCaprio: Among Low’s Hollywood friends who are interested in using Malaysia as a location for their future movies.

“They are very interested. It will have a tremendous impact on our tourism profile when this happens,” he said.

Low’s own entertainment company could be investing in such movies as they plan to set up a special entertainment fund that will invest in ventures from fashion to movies.

He also tells of another superstar friend – Usher – who wants to help him start a charity programme for children here to learn the business part of the entertainment industry.

Q: Where does the Wynton Group go from here?

A: Since I am now in the limelight, we expect to launch our new fund sometime in October. Firstly, there is an initial US$1bil real estate and hospitality fund, mainly for investing in real estate, hotels and hospitality projects around the world.Secondly, we are also looking to launch a US$250mil entertainment fund because we believe there is some synergy between real estate and entertainment.

Q: Are we talking about movies, music or the whole spectrum?A: The whole spectrum. So anything from fashion to movies and so forth. Lastly, we are also looking into a US$250mil general fund. When I mention all these fund sizes, it is initial first phase equity commitment that we are securing which means that actual fund sizes and purchasing power could be much larger.An equity of US$1bil could have a potential purchasing power in excess of US$2bil or more after leverage. Coupled with this, our new headquarters will be based in Abu Dhabi and we have committed to 20,000sq ft in Sowwah Island in Abu Dhabi.We are excited at the growth proposition of Abu Dhabi as a financial hub for the Middle East.

Q: Where is this fund set up?A: It’s Cayman-based with a fund manager potentially based in either Abu Dhabi or the Caymans.

Q: What is this about you and Usher?A: I have known Usher for a long time. I met him in New York and I was working with him on Usher’s New Look Foundation which is a charity that assists children who want careers in the business side of the entertainment industry.I mentor these kids in terms of giving advise on writing business plans, which are things I learnt while at Wharton Business School. We have been talking for the last few months about bringing that programme to Malaysia.Sometimes it appeals to the younger generation to get inspired by not business people but celebrities who have business acumen.

Q; Do you have a girlfriend?A: Yes, my girlfriend is my work. Ask my friends and business partners and they will tell you that I sleep only three to four hours a day and I am always working. I love my work.

Q: A businessman once said that to find out where a business is based, all you have to do is to find out where the secretary is based. So, where is your secretary based?A: My secretary travels with me everywhere I go. So I guess I am based all over the world, although my heart shall always be in Malaysia.

Thursday, 29 July 2010

It will take more than a problem with antenna reception on the iPhone 4 to affect Apple's brand.

This is a company that has faced setbacks before and bounced back to become the world's most valuable brand--worth $57.4 billion, according to Forbes. In a list dominated by tech brands--they made up 30% of the top 50 ranked by Forbes--Apple ( AAPL - news - people ) squeaked by longtime nemesis Microsoft ( MSFT - news - people ), worth $56.6 billion, and Google ( GOOG - news - people ), which came in fifth on the list with a brand value of $39.7 billion. Steve Jobs' creation is among a number of resilient brands, including corporate ones, that have thrived despite business troubles or setbacks.

Apple shows just how a brand can survive and thrive even when a parent company stumbles. Apple's sales in the late 1990s plummeted 46% over a four-year stretch while the company lost money seven times over eight quarters. The stock was trading for less than $4 (split-adjusted) in 1997 before company cofounder Steve Jobs, who had been ousted, rejoined Apple.

The following year Apple released the iMac, the first in a string of monster hits over a dozen years. Sales over the past 12 months hit $57 billion, and net income was $12 billion. The stock is up 60-fold since 1997. To identify the world's most valuable brands we looked at more than 100 with leadership positions in their respective industries. Forbes evaluated these brands along with Jeffrey Parkhurst, managing director of business strategy at Mindshare, a WPP ( WPPGY - news - people )-owned media agency. We required that brands have at least some presence in the United States, because if a brand is to be considered global, it needs to be a player in the United States.

Our first step was to determine earnings before interest and taxes for each brand.Forbes averaged those earnings over the past three years and subtracted from earnings a charge of 8% of the brand's capital employed, figuring a generic brand should be able to earn at least 8% on this capital.

Forbes applied the maximum corporate tax rate in the parent company's home country to that net earnings figure. Next, we allocated a percentage of those earnings to the brand based on the role brands play in each industry. (Brands are crucial when it comes to beverages and luxury goods, but not so much, say, with airlines, when price and convenience are more important.) To this net brand earning number, we applied the average price-to-earnings multiple over the past three years to arrive at the final brand value. For privately held outfits we applied an earnings multiple for a comparable public company.

Tech brands made a big showing on this with 30% of the top 50 brands, including four of the first five places in the rankings. Financial service brands and food and beverage brands each captured six spots. U.S. brands dominated the list.

Most large economies saw output decline in 2009, with the E.U., Japan and U.K. all falling at least 4% (the U.S. economy contracted 2.4%). The brands on our list fared a little better, with sales, on average, flat in 2009. Some brands were hit hard by the economic downturn as well as their own missteps.

Take for example No. 11-ranked Toyota ( TM - news - people ). The brand is worth $24.1 billion, but has been troubled over the past year with multiple recalls that affected a total of 10 million vehicles. Toyota's perceived quality score fell 20% in a survey this spring from Santa Barbara, Calif.-based ALG, which is the industry benchmark for residual values and depreciation data. "Toyota always promoted quality, and then [the recalls showed] they delivered exactly the opposite," says Mindshare's Parkhurst, who argues the fallout would not have been as bad if Toyota's brand promise all these years had to do with, say, horsepower.

Barring any more major setbacks, Parkhurst says he believes Toyota can bounce back over the next two years as the backlash against the brand has already ebbed. Even with the cloud of the safety recalls, Toyota sales jumped 17% in the first half of the year.

Company troubles don't always doom strong brands. Consider Marlboro. Cigarette brands have been on the ropes for years as government restrictions have made it increasingly difficult for tobacco companies to market their products. The settlement signed in 1998 between the four largest tobacco companies and 46 state Attorneys General severely limited tobacco marketing and called for the companies to shell out $206 billion over 25 years to the states to pay for health-care costs.

No tobacco brand has thrived like Marlboro since the settlement. The brand ranks No. 8 on our list, worth $29.1 billion. Marlboro's market share in the U.S. was 33.8% at the time of the settlement; today it's 42.8%, which is greater than the next 12 cigarette brands combined. Marlboro's message has been taken out of mainstream media. The brand, owned by Altria ( MO - news - people ) and Philip Morris International ( PM - news - people ), is now marketed directly to consumers and in places where they gather, with help from a database of the names of 25 million smokers.

Goldman Sachs ( GS - news - people ), meanwhile, has been called everything from evil to a vampire squid, but when it comes to investment banks, Goldman Sachs the brand still reigns supreme. It has been the lead bank in global mergers and acquisitions for eight of the past 10 years. Even with an SEC suit hanging over its head (the company has since settled, agreeing to pay $550 million), Goldman was once again the top M&A bank in the first half of 2010. It had an advisory role on $224 billion worth of deals, which represents 20% of global deal activity, according to Dealogic. The brand is worth $9.4 billion, and comes in at No. 45 on our list.

The United Way is the only nonprofit that makes our list, coming in at No. 26 with a brand value of $14.3 billion. The United Way was founded in 1887 and is made up of 1,800 local United Way chapters in 45 countries and territories. The economic downturn affected the charity as it did most other nonprofits, and donations fell 9% between 2006 and 2008. Yet with $4 billion in annual donations, the United Way is twice the size of the next biggest charity, the Salvation Army.

United Way of America CEO Brian Gallagher has transformed the century-old charity since he took over in 2002. At that time 50% of local United Ways defined fundraising as their primary objective, with the rest focused on community impact. Today 90% of United Ways are focused on community impact. In 2008 Gallagher announced a new plan to refocus the organization on three core issues: education, income and health, with specific metrics for measuring success in each area.

The value of brand names may soon take on a bigger role on the balance sheets of U.S. companies, according to James Gregory, CEO of CoreBrand, a global brand consulting firm. In the U.S. brands often get lumped in as part of goodwill when companies are bought and sold, but outside the U.S. brands can play a more prominent role on the balance sheet. The increasing calls for a standardized global accounting system present an opportunity for the role of brands on the balance sheet, says Gregory.

Black Hat A startling percentage of the world's automated teller machines are vulnerable to physical and remote attacks that can steal administrative passwords and personal identification numbers to say nothing of huge amounts of cash, a security researcher said Wednesday.

At the Black Hat security conference in Las Vegas, Barnaby Jack, a security researcher with IOActive, demonstrated attacks against two unpatched models from two of the world's biggest ATM makers. One exploited software that uses the internet or phone lines to remotely administer a machine made by Tranax Technologies. Once Jack was in, he was able to install a rootkit that allowed him to view administrative passwords and account PINs and to force the machine to spit out a steady stream of dollar bills, something the researcher called “jackpotting.”

“It's time to give these devices an overhaul,” Jack told a standing room-only audience during day one of the two-day conference. “There hasn't been a secure development methodology from the get go. The simple fact is companies who manufacture the devices aren't Microsoft. They haven't had 10 years of continued attacks against them.”

In a second attack against a machine from Triton Systems, Jack used a key available for sale over the internet to access the model's internal components. He was then able to use a install his rootkit by inserting a USB drive that was preloaded with the malicious program.

Both Triton and Tranax have patched the vulnerabilities that were exploited in the demos. But in a press conference immediately following his talk, Jack said he was confident he could find similarly devastating flaws – including in machines made by other manufacturers as well.

Jack said he wasn't aware of real-world attacks that used his exploits, but this foiled attack from earlier this year appears to involve many of the same techniques.

“Every ATM I've looked at, I've found a game-over vulnerability that allows me to get cash from the machine,” he said.

To streamline his work, Jack developed an exploit kit he calls Dillinger, named after the 1930s bank robber. It can be used to access ATMs that are connected to the internet or the telephone system, which Jack said is true of most machines. The researcher has developed a rootkit dubbed Scrooge, which is installed once Dillinger has successfully penetrated a machine.

Jack said vulnerable ATMs can be located by war-dialing large numbers of phone numbers or sending specific queries to IP addresses. Those connected to ATMs will send responses that hackers can easily recognize.

Jack called on manufacturers to do a better job securing their machines. Upgrades for physical locks, executable signing at the operating system kernel level and more rigorous code reviews should all be implemented, he said.

The talk came one year after a similar one was pulled last year. Jack said the cancellation came because there weren't patches in place for the vulnerabilities he planned to demonstrate.He said he was grateful for the extra year to research the vulnerabilities.

World Exclusive!Mystery man jetsets with Arabs and parties with celebs

KUALA LUMPUR: International Man of Mystery Jho Low, who parties with Paris Hilton and is reputed to chalk up hefty bills for champagne, has finally come out to talk about himself and the life he lives.

In an exclusive interview with The Star, this 28-year-old multilingual Penangite, whose full name is Low Taek Jho, reveals for the first time:

> His Arab childhood friends and investors are actually the spenders, not him;

> How he made his first million when he was just 20 and the billions in deals he had strung together so far;

> The importance of going to the right schools;

> Setting up a portfolio worth billions that will go public in October;

> He parties with Hilton, Megan Fox, Jamie Foxx, Lindsay Lohan and Usher but claims that news reports about the parties are exaggerated.

> How he grew up in Penang and his present globe-trotting life covering Los Angeles, New York, London, St Tropez, Abu Dhabi and Kuala Lumpur.

Wednesday, 28 July 2010

REFLECTING ON THE LAW

By Prof SHAD SALEEM FARUDI

Our basic charter needs to be interpreted creatively and dynamically. Judges should be receptive to the felt necessities of the times and their interpretations should show suppleness of adaptation to changing circumstances.

AT the Bar Council’s Biannual Law Conference this weekend, one of the topics slotted for discussion is “Constitutional Interpretation”.

As one of the invited speakers, it is my intention to point out that interpretation is an art and not a science. Legal words do not have a self-evident meaning and the “golden rule” of interpretation is that there are no golden rules.

This is especially so when the clauses of the Constitution are deliberated. A Constitution is not just a lawyer’s document. It is the vehicle of the community’s legal, political and social life. It is the repository of the nation’s dreams and demands and its values and vulnerabilities.

It is a generic law which provides the foundation on which the superstructure of the state rests. It protects fundamental freedoms. It seeks to reconcile the irreconcilable conflict between the might of the state and the rights of the citizens.

The glittering generalities of our basic charter need to be interpreted creatively and dynamically because the Constitution was not made merely for the generation that existed at the time of drafting but for all posterity.

Being a living piece of legislation, its spirit should always be the spirit of the age. Judges should be receptive to the felt necessities of the times and their interpretations should show suppleness of adaptation to changing circumstances.

How have our judges handled our document of destiny? How have they performed their solemn duty to “preserve, protect and defend” the basic charter? Regrettably, the record is not very laudable. In many areas of social life, Malaysians can proudly count many blessings but as to the contribution of the superior courts to constitutionalism, there is not much to celebrate as we approach 53 years of independence.

Despite the principle of constitutional supremacy in Articles 4(1) and 162(6), our courts have shown extreme reluctance to invalidate parliamentary legislation or state enactments on constitutional grounds.

There have been 20 or so cases in 53 years where constitutional review succeeded at some stage of the proceedings. Sadly, eight of these rulings were reversed on appeal. Two were set aside by constitutional amendments. That leaves 10 decisions in 53 years where judicial review of a legislative measure left an impact.

However, in a host of other situations, the courts have refused opportunities to import principles of constitutionalism from abroad that would have limited unrestrained legislative or executive power.

For example, in Eng Keock Cheng, the issue was whether a law-making authority can delegate its powers to another body so broadly as to constitute abdication. The doctrine against excessive delegation, usefully employed abroad, was, however, rejected by our courts.

On the issue of constitutional amendments, the scintillating idea that the amendment process cannot be abused to destroy the “basic structure” (or core principles) of the Constitution was turned down.

A bold High Court ruling, based on Indian precedents, that the Emergency Proclamation issued in 1969 cannot last for ever and can come to an end by efflux of time was brushed aside.

The notion of implied, un-enumerated, non-textual rights has been rejected. In the Aliran case, legislation like the Printing Presses & Publications Act with blatantly unconstitutional provisions was allowed to stand.

It defies constitutional imagination how in a country with a supreme Constitution and a chapter on fundamental liberties a law can confer “absolute discretion” to grant or refuse a printing permit or “to impose any condition the Minister deems fit”.

The reasonableness, justice or morality of any legislation is not the concern of our courts. As long as a law was passed by the competent authority in the proper manner, it is valid irrespective of its content.

This is in contrast with the jurisprudence of many countries that Parliament’s power to enact “law” is circumscribed by the understanding that the term “law” does not refer to harsh or oppressive measures but to rules that are fair and just.

Obviously, the British doctrine of parliamentary sovereignty continues to command loyalty in many judicial minds even though Malaysia is blessed with a written and supreme Constitution.

In its relationship with the executive, the courts have a similar mixed record. There are some extremely bold decisions. For example, in the ISA cases of Tan Sri Raja Khalid, Jamaluddin Othman, Abdul Ghani Haroon, Abd Malek Hussin v Borhan Hj Daud and Thamilvanen a/l Kandasamy the courts issued the writ (order) of habeas corpus to free the detainees unlawfully detained.

Civil servants, workers in the private sector and detainees under various drugs legislation have a very good fighting chance of winning their gladiatorial contests in the courts.

Ouster clauses in industrial relations legislation seek to exclude any judicial scrutiny. Our courts disregard these clauses, as indeed they should, and do justice suitable to the case.

Regrettably, however, denial or delay of the right to legal representation under Article 5(3) has generally aroused indifference. We have a remarkable decision that a detainee’s right to legal representation commences from the time of arrest but cannot be exercised till police have completed their investigation.

The courts seem to have graded human rights. The right to property, protection against double jeopardy and protection against backdated criminal laws are given adequate protection. However, personal liberty, freedom of speech and equality are almost always subjected to wide executive power to restrict on grounds of public order, etc.

Freedom of religion was one of our best protected rights. In a sad reversal in the last 15 years, the courts have turned a blind eye towards many painful and tragic issues surrounding this right.

In many areas of executive power, the courts generally refrain from treading in, and the decision by the state is declared to be non-reviewable. Examples of such areas of absolute power are the subjective satisfaction of the Minister in preventive detention cases; the issuance and continuance of emergency declarations under Article 150; the power to grant mercy and the Attorney-General’s powers under Article 145 to commence or discontinue criminal proceedings or to transfer a criminal case vertically or horizontally to another court.In many other countries, a rich jurisprudence has evolved to surround these executive domains with humanising principles of openness and accountability.

On issues of apostasy and Islamic law in general, our superior courts are happy to hand the matter over to Syariah Courts even though momentous issues of constitutionality may be at stake. We have an instance of a non-Muslim woman being advised by a superior court judge to submit herself to the jurisdiction of the Syariah Court despite the fact that Schedule 9 List II Para 1 clearly provides that Syariah Courts shall have jurisdiction only over persons professing the religion of Islam.

Despite 53 years, the Constitution has not become the chart and compass, the sail and anchor of our legal life. Its imperatives have not been transformed by the courts into the aspirations of the people.

But there is still hope. Malaysian constitutional jurisprudence has many seeds for growth. Under the leadership of Justice Datuk Seri Gopal Sri Ram and a number of other dynamic judges, public law issues are often seen in the context of constitutional safeguards.

In some cases, issues of natural justice and unreasonableness are linked with the Constitution. This elevation of administrative law issues to the pedestal of constitutional law holds much promise. But we have to wait and see. There are currents and cross currents to keep hope alive.

Tuesday, 27 July 2010

GAME ON: Some students who participated in the Microsoft's Kodu Kup competition showing off their skills at the company's launch event in Kuala Lumpur.

KUALA LUMPUR: Software giant Microsoft Malaysia wants to nurture fledgling game developers from as young as nine through its game design competition, known as the Kodu Kup.

According to its education director Farad Alhusaini, computer games are no longer just for entertainment; they are now also an important educational tool that can spark a culture of creativity and innovation in our youngsters.

For this reason, Microsoft is putting its resources firmly behind the Kodu Kup competition. "Kodu is a fantastic avenue to inspire students to understand the fundamentals and principles of computing and software development," Farad said.

Participants must develop a computer game using Kodu Game Lab - a simple and visual programming language develop by Microsoft Research.

The program offers a straightforward, fun and easy to use a visual interface, where the users only need to click and string together intuitive icons that define the rules of their game world.

Then, they use a mouse and keyboard - or even better, a gamepad - to navigate the program. No complex programming language to learn and absolutely zero lines of code needed, explained Farad.

"The result is that anyone aged from seven to 70 can create a game in minutes," he said.

Connected

The Kodu Kup competition is a preliminary step to the bigger event that is Microsoft's Imagine Cup. The Imagine Cup is a global competition sponsored by the software giant to encourage university students to develop technology that helps solve the world's problems.

This year, the Imagine Cup final was held in Warsaw, Poland. The Malaysian team did the country proud by beating more than 60 other international teams to make it to the final, in the Software Design category.

"Malaysia needs to start looking among its younger generations to find talented students who will succeed even more in such competitions in the future," Farad said.

"This is where the Kodu Kup competition comes in, he said. "The primary target of most computer games are youngsters, so why not give them the chance to be in the driver's seat - i.e. to create such games, instead of merely playing them."

The Kodu Kup competition will run till Aug 20 and is also open to teachers. Student participants will be judged on creativity, game design, and the fun factor of their games.

Teachers who enter the contest, must showcase how Kodu Game Lab can be used effectively in the classroom, not only to stimulate critical thinking but also how it can help develop problem-solving and logic skills in students.

The aim here is to let teachers inspire and excite their students to learn and experiment, as well as to bring back the "cool" factor in education, according to Farad.

The prizes

Results of the Kodu Cup competition will be announced on Aug 27. The winning student and teacher will each receive a trophy, a notebook PC, an XBox 360 gaming console, as well as various Microsoft software and hardware.

The competition is supported by Yayasan Inovasi Malaysia (YIM), a foundation under the Ministry of Science, Technology and Innovation.

Prior to the launch of the competition, the participating teachers and students had to undergo two-day training sessions with Kodu Game Lab specialists from Microsoft and ideaslab. ideaslab is an organisation based in Victoria, Australia, which serves as a hub for national and international research into learning and teaching technology.

IMMINENT DANGER: According to a Sophos survey in December 2009, 60% of the respondents believed that Facebook presents the biggest security risk compared to other social networking sites - way ahead of MySpace, Twitter and LinkedIn. - AP

THE Internet is a lot more than just a means of staying informed. It has evolved into something much more than what it was originally intended to be.

For some, it is an avenue to avoid the long queues at banks and service counters. For others, it is a place where you can work collaboratively.

But for most, the Web is a communication tool that connects them with family and friends via the many social networking tools.

Most Internet security experts conclude that cyberattacks on social networking sites will increase over the years. Since 2008, Facebook, Twitter, MySpace, LinkedIn, and other such sites have been in the limelight as social networking grew and grew.

These services compete with each other to increase their user base by coming up with mobile tie-ups, applications and games.

All these efforts are worthwhile because social networking sites are the biggest thing on the Internet at the moment, and perhaps for many more years to come. Unfortunately, this trend has also been attracting all sorts of security threats.

New year, new threats

In its 2010 Threat Predictions report, McAfee Labs said it anticipates an increase in threats related to social networking sites such as Facebook.

It also said that criminal tool kits will be evolving rapidly this year to capitalise on new technologies that increase the sophistication of the attack on unsuspecting users.

And, as a result, there is a good chance of an increase in rogue services that exploit Internet users' eagerness to download and install the various and freely available Web 2.0 applications.

According to a Sophos survey in December 2009, 60% of the respondents believed that Facebook presents the biggest security risk compared to other social networking sites - way ahead of MySpace, Twitter and LinkedIn.

Cisco Systems' 2009 Annual Security Report mentioned that the Facebook user base has tripled from 100 million users in 2008 to 350 million in 2009.

There is no doubt that such a huge increase in the number of users within a year's time is phenomenal, and it is attracting cybercriminals from all over the world to migrate their attacks to Facebook.Mitigating threats

In order to stay safe while using social networking tools (or in fact, other Internet-based applications), users are urged to observe the following practices:

1. Never click on any URL links in unsolicited e-mail (i.e. e-mail that you are not expecting nor asked for);

2. Never log in your online credentials through pages opened up by the URL links you get from any e-mail. In order to be safe, type the URL yourself in the browser. If you have been using shared PCs, be sure not to click on the links provided by the browser bookmarks;

3. Never jot down your online login credentials in an e-mail, even if you think of it as a note to yourself. e-Mail is not the proper place to store your online login credentials. This is to minimise the risks should your e-mail system be compromised;

4. Always verify the validity of the services or links you get via e-mail, even if it appears to be sent by a social networking tool you subscribe to. Google it or better yet, e-mail the service administrators and ask them. Pay extra attention to the given URL as a slight difference would mean a different site altogether;

5. Change the passwords of your online credentials from time to time and do not use the same password for all of them. For a secure password, use a combination of uppercase and lowercase alphabets and numbers, and try to use words that do not exist in any dictionary; and

6. Do not arbitrarily download any updates for your applications. If you really need them, visit the official website and get more information.

Conclusion

It is imperative that Internet users understand that the threats and security issues which come with social networking tools aren't necessarily caused by vulnerabilities in the software or the user's PC … at least, not all the time.

Software vulnerabilities are reported from time to time and they will always be the cornerstone of cybercriminal activities. But for them to work, they have to be initiated by the users themselves in one way or another.

(Syahrir Mat Ali is senior executive of the cybermedia research department at CyberSecurity Malaysia - the national cybersecurity specialist under the Ministry of Science, Technology and Innovation. These are his personal views expressed here.)

“Spirits are everywhere all the time, day or night, you just can’t see them.

“There are people who are not superstitious and they will be willing to buy the property, especially if they can make a profit from it,” she said, when asked if it was okay to leave an apartment empty if there were cemetery plots on both sides of the property.

“If a property does not sell, it is not necessarily because of bad feng shui. You may be asking too high a price. A buyer will already have scouted the area for the right price. Try lowering the price, and you might be able to sell it off.”

To a question on colour schemes, Ong said certain people suited certain colours and people should observe how they felt or how things fared when they chose a certain colour to wear.

Asked if it was really suay (unlucky) to wear all black or black and white, Ong said that it was true that the colours did not suit many people:

“Try it for one or two days, if it does not feel good or things go wrong, then the colours are probably not suited to you,” she said.

Speaking in Hokkien and Mandarin, with English translation provided by master of ceremonies Por Joo Tee, Ong also advised the crowd to try not to wear red or use too much red.

A couple then told how they fell in love with a painting of a tiger and bought it for their home only to be told by a medium that the tiger would “eat up” all their fortune.

Ong said paintings of animals had no bearing on people but reminded them to place them only in the hall and not in the bedrooms, and that the paintings had to face another wall and not the main door or balcony.“It is only a painting, and cannot harm us. But if you feel unhappy after putting up any decoration, then just take it down,” she said.

Asked on the best stance or image to choose when buying idols of deities, Ong said what mattered more was the idol’s condition.

“If after some time praying to the idol, you feel that things are going well, then it should be fine. If you feel that things are falling apart, then it’s probably not right,” she said.

Asked if the idols of Hok Lok Siu (three Chinese deities representing good luck, status and longevity) could be placed inside the house, Ong said they could only be placed as decorative pieces but not as idols to pray to because they were only supposed to reside at temples and not at houses.

She also told the audience to pray from the heart and not out loud and face the sky with eyes closed and hands clasped together, preferably between 6am and 11am, and to say please when praying.

“Don’t be too greedy but remember to pray for your own health and strength first before praying for your loved ones,” she added.

She said some old houses had bad chi because of spirits that co-habited the space over the years.

“There are three types of spirits - those that are wandering as they could not move on after death, those that chose not to move on though they could, and the bad ones that go around causing trouble,” she said.

Ong added that proper cleansing had to be done to appease the spirits that caused distress or unrest to those who occupied the house.

“When I enter a premises with bad chi, I use my sixth sense to get a clear picture of the situation and instructions from my spiritual master, and take it from there,” said Ong.

She will share her thoughts on a combination of feng shui and paranormal phenomena during her talk on ‘Protecting Your Property From Bad Energy’ at 4.30pm on Sunday at the Star Property Fair 2010.

Her talk will be in Hokkien and Mandarin, with a smattering of Bahasa Malaysia and English. There will be a translator on standby to help with the question-and-answer session. The talk is for non-Muslims only, and admission is free.

Ong will also be giving tips on auspicious locations within a house, choosing colour schemes and how best to arrange certain furniture.

The talk will be among the highlights of the three-day fair to be held at G Hotel and Gurney Plaza from 10am to 10pm starting today until Sunday.

More than 20 major developers, including some from Kuala Lumpur and Ipoh, will offer an array of property launches, special packages and attractive rebates during the event, organised by Star Publications (M) Bhd in collaboration with Henry Butcher Malaysia Penang.

Spiritual activity heightens

THE seriously ill are more susceptible to death during the Phor Thor or Hungry Ghost month, according to spiritual healer Master Ong Q Leng.

Ong, 34, said in the recently concluded seventh lunar month, a few of her patients, who were on the road to recovery, simply gave up and succumbed to their illnesses rather than burden their loved ones who had to care for them.

“One patient was progressing well. The colour had returned to her cheeks but she had a change of heart and told her daughter who was bathing her one morning to hurry up as ‘they’ were waiting for her.

“She suddenly passed on in the middle of her bath,” said Ong, who also noted that there had been many cases of murder and suicide during the period.

She said those, who had seriously ill loved ones, should provide them with more love and care during the seventh month.

“You can tell that it is time for them to depart if they can no longer eat and sleep, the face has turned pale and yellowish, and the eyes are lifeless,” she added.

The Hungry Ghost month had always been a busy time for Ong, who offers services of healing, spiritual cleansing, feng shui tips and general consultation.

“One client sought my services after friends spotted two young children in the back seat of her car. It turned out that she had two previous abortions and the boy and girl spirits were her two children.”

Ong said spirits were at their most powerful during the seventh month but those released from the gates of hell were not harmful.

“The harmful spirits are the wandering ghosts that roam the earth freely throughout the year.”During the Hungry Ghost month, she said it was best that children, aged below five, stayed indoors after 7pm, and adults low on luck did the same after 9pm.

She also advised people not to consume too much alcohol or speak nonsense during the seventh month, and not to quarrel or fight at home as that would attract an “audience” to watch the drama.

“Don’t scold but be more loving to your spouse and children, and smile more to avoid misfortune,” she said.

Ong also advised those who observed the Hungry Ghost festival to burn smaller offerings for their departed loved ones during that month.

“When you burn too many things, it will attract greedy evil spirits who come and snatch the offerings from your loved ones.

“Smaller amounts attract less attention and that means more chances that your loved ones will receive them.

“You only need to burn offerings for someone once a year and it should be done during the day, that is between 8.30am and 7.30pm,” she said

Monday, 26 July 2010

GOVERNANCE MATTERS

By SHIREEN MUHIUDEEN

ONE of the big questions we faced in the recent spate of annual general meetings (AGMs) is that whether companies should renew the contract or replace the audit firms. And, how does a company decide when appointing an auditor?

An auditor is supposed to be the company’s best friend, the sort that tells it what it needs – not wants – to hear, especially when the chips are down. But when listed companies in South-East Asia recently held their AGMs, these meetings exposed the annoying reality that the auditors of some of these companies have been unreliable friends.

To be sure, an auditor is in an unenviable position from the start. He is the company’s disciplinarian and so is there not only to ensure that the company complies with financial reporting standards and other best practices, but also to forewarn it of anything risky that might suddenly blow up.

These responsibilities have become even more complex in recent years, as there are now so many different industries and companies with complex structures; an audit firm needs to have sector specialists to manage the audit function effectively. One would presume that gone are the days when auditors should be able to just rubber-stamp a company’s finances.

Even so, we wonder how many auditors tell their client companies hard truths as well as red-flag their transgressions? Will they lose their clients if they push them too hard on tough issues? How far can they push their clients? Should they resign if clients stop taking their advice? From our experience, one thing is very clear: “There are auditors, and then, there are auditors.”

Recently, we reviewed a company that was supposedly recovering. We noted in our review that this company and all its subsidiaries after 10 years were still in the red as at Dec 31, 2009, and the board and management didn’t seem to know how to reverse that. We dug further and found that its share premium rose significantly over the decade because its fixed assets - primarily land for development - had been revalued.

What was very clear is that each time the land was developed and the properties sold, there were writedowns on the value of the assets. This suggested that the existing assets on its balance sheet were overvalued.

These seedy activities raise obvious questions:● Where were its auditor’s red flags?;● What was the auditor’s advise before the writedowns?; and● Did the auditor assess the risk sufficiently before the company revalued the land or did he just bow to its wishes?

This company also cut deals with related parties, and every year for the last seven years wrote these transactions off, which cost it millions of dollars. These losses were too large and too often to be dismissed as occasional business risks.

To get some answers, we reviewed the composition of the company’s board of directors and audit committee. We zoomed in on the audit committee as the obvious source of the oversight. It has three members, or so-called independent directors, two of whom are in their 70s, and have been on it since 2000.

The third is an ex-politician who is well-connected.

While all three have had fairly successful careers, they seem to no longer be able to insist that the company desist its loss-making moves. That’s because these audit committee members must have been aware of all the company’s related-party transactions and write-offs for almost seven years.

We also compared the total audit fees paid. This company paid audit fees which were considerably lower than the average fees paid in the same sector. One wonders if the choice of the auditor was based primarily on fees and not on the best practices that the firm abides by.

We also wondered whether the audit committee discussed any of its real concerns with the external auditors. After all, the company’s annual report states that its board of directors and audit committee will meet every quarter “to acknowledge and monitor” its performance outcome, with “the counterbalance and revision” of the independent directors.

In the same report, this company also stated that it “believes in a good management system” and avowing that its directors and executives had “vision”, were responsible and had a “balance of power mechanism to ensure and monitor transparent management and equitable treatment for its shareholders.”

How can a company state all these when it is consistently losing money, does not have a single subsidiary that is profitable, indulges habitually in related-party transactions and then, consistently writes them off?

We can only wonder how its audit committee members and its other independent directors discharge their duties amid all of the above activities. For now, their profiles and records of attendance at meetings give us neither relief nor belief that they really are, as the annual report puts it, “adhering to the principles of the stock exchange for the optimal benefit of the Company”.

What is very clear to us is that the investment community should stand up and question companies that vote in auditors purely based on fees and cosy friendships.

● Shireen Muhiudeen is managing director of Corston-Smith Asset Management in Malaysia, a fund management company that makes investment decisions based on corporate governance.

Balancing an accounting problem

By GOH KEAN HOE

LATELY, IFRIC 15 has become a hot topic among accountants and leading property developers in Malaysia. Developers here have been using the percentage method for decades to report revenue from projects sold under the sell-and-build system. Naturally, they were shocked when ‘told’ to change to the completed method.

(IFRIC 15 is an interpretation issued in July 2008 by the International Financial Reporting Interpretations Committee to cover agreements for the construction of real estate. The document is meant to standardise accounting practice across jurisdictions for the recognition of revenue among real estate developers for sales of units before construction is complete.)

The message to the marketplace from the Malaysian Accounting Standards Board (MASB) and Malaysian Institute of Accountants (MIA) is that under IFRIC 15, property developers can only recognise the revenue when the construction is completed and the completed units are handed over to the purchasers. The top audit firms have also indicated to their clients to prepare for this fundamental change.

The developers are perplexed. Some ask: “Does that mean we were wrong to use the percentage method all this while?”

A general explanation is that property developers are selling goods and not providing construction services.Hence, revenue can only be recognised when the goods are delivered to the purchasers.

Which paragraph?

That may be true, but to be exact, IFRIC 15 lists three categories of agreements:

(a) The agreement is a construction contract;(b) The agreement is for rendering of services (only); and(c) The agreement is for sale of goods (services plus materials)

For types (a) and (b), IFRIC 15 says the appropriate method is the percentage method. For type (c), the applicable method depends on whether the agreement meets the criterion set out in paragraph 17 or paragraph 18 of IFRIC 15.

Paragraph 17 says: “The entity may transfer to the buyer control and significant risks and rewards of ownership of the work in progress in its current state as construction progresses. In this case, ....”Paragraph 18 says: “The entity may transfer to the buyer control and significant risks and rewards of ownership of the real estate in its entirety at a single point of time (e.g. at completion, upon or after delivery). In this case, ...”

So which paragraph should apply to the Malaysian property development industry? Whose WIP (work in progress) is it?

But the answer is more than just about the legal ownership of the properties or WIP.

In accounting, substance is more important than form. In fact, the concept of “continuous transfer of control, risk and reward” introduced in IFRIC 15 is rather new and obviously, not well or easily understood even by accountants. IFRIC 15 acknowledges that circumstances that meet the criterion of paragraph 17 may not exist frequently.

In addition, IFRIC 15 requires an entity to disclose how it determines which agreements meet that criterion. It seems that the International Accounting Standards Board (IASB) is biased towards the completed method by making it tougher to apply paragraph 17.

Noting that the draft of IFRIC 15 (issued in 2007) might not have addressed the industry practice in Malaysia, I included a suggestion in my letter for IASB/IFRIC “to examine various typical sales agreements on uncompleted real estate and categorise them as much as possible (or by way of examples)”.

IASB did take into consideration many of the comments and concerns raised, and yet, did it fall short of addressing adequately our unique circumstances?

Percentage vs completed

Can the circumstances in Malaysia be differentiated from those in other countries to justify the use of the percentage method?

Based on my observation, the general view is that there are either equally strong arguments for both methods and any difference could be just a fine line, or there is no a clear answer due to lack of specific guidance in IFRIC 15 for our unique circumstances.

Since the MASB and MIA have taken the view that the completed method is the way to go under IFRIC 15, it will be useful if they issue a formal document putting forward their views, with the basis and arguments, so as to convince the property developers and the doubters that this is the correct way.

To conclude that we do not meet paragraph 17 and hence, the completed method shall apply, is an easier task, but the important consideration is if the financial statements will still provide a true and fair view of the financial position and performance of the developers.

It is understood that the Real Estate and Housing Developers’ Association (Rehda) recently submitted a memorandum to the MIA and other relevant bodies about their view, which is biased towards the percentage method.

The objective of IFRIC 15 is to clarify existing standards and to standardise the accounting practice worldwide. Singapore converged to IFRS (international financial reporting standards) in 2005.

However, it has yet to adopted IFRIC 15 and is still trying to find ways and means to interpret it correctly and in such a way that it can be accepted by all stakeholders. Meanwhile, the percentage method continues to be used there.

Hong Kong, on the other hand, has switched to the completed method since its convergence to IFRS in 2005. In my view, for Malaysia to solve this issue and to make sure we get it right, we must go through a due process as follows:

● To understand thoroughly IFRIC 15 and also related accounting standards – IAS 18 and IAS 11 as well as the upcoming new standard on revenue recognition. This may necessitate consulting the IASB on unclear areas.● To understand exactly the property development business and to critically review the industry practices, laws and the terms of the typical sale and purchase agreements in order to understand completely the relationship between the developers and their customers. The relevant substance must be identified and given due consideration.● To compare with other countries such as Singapore, Hong Kong, Australia, Britain and the United States on the industry practices and laws and the accounting treatments.

Remember the objective of financial statements

We must consider two more factors. First, we cannot totally ignore the unique characteristics of this industry – that real estate is an immovable asset and that the construction element can be undertaken by another engineering firm so long as the design and specifications are available.

Second, the ultimate objective of financial statements is to provide useful and relevant information for users to make economic decisions.

Hence, it must be true and fair, and reflect the economic and business activities and events that happened during the reporting period, including any value added or destroyed.

Another point is that many may not be aware that our Companies Act and the FRS 101 (on presentation of financial statements) actually provide that if applying an accounting standard or interpretation will not result in true and fair financial statements, the directors should not apply it.

I suspect many companies may consider making use of this provision.

Finding a good solution to this issue is by no means an easy task. It is important that the MASB, MIA and Rehda pool their resources to resolve this. Since the real estate laws and practices in Singapore and Malaysia are quite similar, it may not be a bad idea for the two countries to cooperate on this matter. Will accountants in Malaysia, and perhaps in Singapore as well, have the same opinion on an accounting issue for once?

● Goh Kean Hoe is a partner of TKNP International and a trainer consultant with Globalacc Research & Training Sdn Bhd. This article is an abridged version. For feedback and requests for the full article, email him at gkh2001@tm.net.my.

Get set for new accounting rules

By Adrian Lee

THE International Accounting Standards Board’s (IASB) new thinking on financial instruments accounting represents a big departure from the current FRS139/IAS39. Many entities may need to undertake another round of changes in systems and reporting to comply with the new IFRS9 requirements.

Most entities in Malaysia would have already adopted FRS139 Financial Instruments: Recognition & Measurement, which became effective on Jan 1, 2010. FRS139 is a standard dealing with financial instruments accounting and represents a major change from how financial instruments were accounted for in Malaysia before.

Derivatives (e.g. foreign exchange contracts, options) and many financial assets such as investments in shares and debt securities are now required to be stated at fair value. The standard also introduces complex hedge accounting and impairment rules.

Whilst entities in Malaysia are familiarising themselves with the new FRS139 requirements, they need to also be mindful that another major revamp to financial instruments accounting is currently ongoing at the international level.

FRS139 is largely based on IAS39, first issued in 1999 by the International Accounting Standards Committee (IASC), the predecessor to the IASB.

The IASB is, however, currently undertaking a comprehensive review of financial instruments accounting and aims to replace IAS39 with a new financial instruments standard referred to as IFRS9 Financial Instruments.The IFRS9 project is partly driven by requests for reform from the Group of 20 and other constituents. The IFRS9 project is divided into three main phases: classification and measurement, impairment, and hedge accounting.

The IASB aims to complete all phases by the second quarter of 2011. To date, the classification and measurement phase has been completed and draft proposals arising from the impairment phase have been issued.

Under the classification and measurement phase, the four categories for financial assets under IAS39 (namely held to maturity, loans and receivables, fair value through profit or loss, and available for sale) are replaced by just two categories i.e. amortised cost and fair value.

An entity’s “business model” condition is introduced to determine the appropriate classification for financial assets. If an entity’s business model’s objective is to hold assets to collect the contractual cashflows, then the financial assets are measured at amortised cost.

This change is intended to make it easier for entities to measure their financial assets (particularly quoted debt securities) at amortised cost rather than fair value. Hence, unlike previously, an entity does not have to hold all debt securities to maturity to qualify for amortised cost measurement.

Other key changes

There are also key changes in the accounting for investments in equity investments (shares).

Equity investments are generally measured at fair value and gains/losses on fair value changes are recognised in profit or loss. However, an entity may elect to present the fair value changes to other comprehensive income (OCI) instead. The election is irrevocable and can be made on an individual share-by-share basis.The OCI route is somewhat similar to the “available for sale” category in the current IAS39.

However, there is no longer the need to test these equity investments for impairment. Hence, any fair value losses can remain in OCI without considering the need to recognise the losses in the profit or loss.

The “drawback” is that the amounts in OCI (gains or losses) are not recycled to profit or loss, even when they are realised, i.e. when investments are sold.

Under the impairment phase, the IASB is proposing some fundamental changes in respect of the recognition and measurement of losses associated with loans and other receivables.

One of the key criticisms of the current “incurred loss” model for loan loss provisioning is that it is “too little, too late”. The current model only allows loan-loss provisions to be made when there is objective evidence of impairment. A loss event – for example, default by borrower – must happen.

The problem with this approach is that there is no build up loan-loss provisions prior to the loss event, even though it is expected that some loans will default over the life of the loan portfolio.

‘Expected cashflow’ model

The IASB attempts to address this by proposing the “expected cashflow” model for loan-loss provisioning.An entity would now estimate the expected credit losses from a loan portfolio. The loan-loss provision will then be built up, via an adjustment to the interest income recognised, over the life of the loan portfolio. This has an effect of smoothing out the expected loan-loss provisions over the life of the loan portfolio.

However, any subsequent changes to expectations in the credit loss or cashflows will be immediately recognised in the profit or loss. This could potentially introduce some level of volatility to the profit or loss arising from changes in expectations.

The proposed impairment changes also impact the measurement of revenue and trade receivables of non-banks.

Similar to banks, corporates are also required to estimate the expected credit losses arising from their trade receivables. However, these losses are then immediately deducted from the revenue. Revenue would now be stated at net of expected credit losses.

Though the MASB has indicated that it is unlikely to adopt IFRS9 until the IASB has completed all three phases of the project, corporates should familiarise themselves with the standard and take cognisance of the potential impact of the requirements of IFRS9 on their operations.